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As a working professional, many of you have heard about the term house rent allowance, commonly tagged as HRA. It is a crucial component in the individual’s salary structure. The HRA is subject to distinct aspects apart from basic pay and comes under the ambit of exempted tax. It is the amount deductible from the overall income while filing income tax. Let’s comprehend the detailed meaning of HRA and how to make the most out of HRA deductions:
What is House Rent Allowance?
House Rent Allowance (HRA) is an inclusive component of an individual’s salary. It is the amount paid by the employers to their respective employees to meet the expense of rented accommodation. HRA allows tax benefits, and it is applied to both salaried and self-employed professionals.
However, for salaried individuals, the HRA exemption is considered under Section 10 (13A) of the Income Tax Act. On the contrary, for self-employed individuals, the claim for HRA deduction comes under the spectrum of Section 80GG of the Income Tax Act. Nevertheless, some of the basic criteria to avail the benefits of HRA are being followed:
- An individual should be a salaried employee.
- HRA should be an integral component in the salary structure.
- The person should live in rented accommodation and be supported by credible evidence such as rent receipts.
- Self-employed individuals can get HRA benefits as per section 80GG of the Income Tax Act.
Available HRA deduction
Under section 10 (13A) of the Income Tax Act, an individual can receive HRA tax deduction according to the following:
- The amount received from the employer as house rent allowance.
- The actual rent is paid by an individual annually minus 10% of the basic salary.
- 50% of the basic pay if the person resides in metro cities.
- 40% of the basic salary if an individual lives in non-metro cities.
Remember, among the four options, the least amount is taken into consideration for the maximum HRA deduction. To make the most of the HRA deduction, you can communicate with the employer and restructure the current salary in the best possible manner. Let’s understand the calculation of the HRA tax deduction through an example:
Mr. Anurag Bhattacharjee is a salaried employee and lives in Delhi. He pays ₹12,000 as rent for residential purposes per month. His monthly salary is ₹50,000, and the clear breakaway of the monthly salary is as follows:
Basic Pay – ₹30,000
Allowances – ₹8,000
HRA – ₹10,000
PF – ₹2,000
a) An annual HRA received of ₹1,20,000 (₹10,000×12 = ₹1,20,000)
b) The annual rent he pays is ₹1,44,000. Annual rent paid minus 10% of the salary (₹12,000×12 – ₹36,000= ₹1,08,000).
c) Delhi is a metro city. Therefore, 50% of the basic salary is ₹1,80,000 (50% x ₹3,60,000 = ₹1,80,000)
So, the maximum HRA deduction Mr. Anurag Bhattacharjee can claim is the lowest among the three, which is ₹1,08,000. The remaining HRA allowance, which amounts to ₹36,000, is taxable under the provision of the Income Tax Act.
Essential Documents Required to Claim HRA deductions
Getting HRA exemption comprises a proper assessment of the required documents to prevent any sort of maliciousness. Here is the list of important documents that are mandatory to claim the benefits of HRA:
- Rent receipts that endorse the rent paid by the individual employee.
- Suppose the cumulative annual rent exceeds ₹1,00,000. Then the individual has to provide the PAN card details of the landlord. However, a written declaration is required and duly signed by the landlord in the absence of a PAN card.
So, by knowing all the details related to HRA, you’ll be able to make the most out of it and save maximum. Click here if you would like to know more about HRA deductions.
